Lies, Damn Lies & Franchise Statistics

Lies, Damn Lies & Franchise Statisticsby Sean Kelly, Editor, FranBest

In his autobiography, Mark Twain quoted Benjamin Disraeli as having said that there are three kinds of lies: Lies, Damned Lies and Statistics. Had they been involved with franchising, I’m sure they’d have made the third “Franchise Statistics.”

In franchise promotional copy there is a commonplace, but patently false, survival statistic that has been cited with for the past two decades with the assuredness and zeal of an urban legend. In fact, it is quoted so often that many of those who use it probably believe it’s authentic, while many others figure they can get away with perpetuating the lie, since they can cite major trade publications as a secondary source. The bogus statistic is usually a variation of one of these statements that follow.

Here’s a statement made in the brochure of a large rent-to-own franchise:

Over 67% of independent start up businesses fail within the first three years with 38% failing in the first year alone. However, over 90% of franchises remain in business after five years as opposed to only 23% of independent businesses. These statistics alone show why franchising is the optimum choice for any serious investor.

Here’s a bogus statistic from the website of a computer-repair franchise:

According to the United States Department of Commerce franchises have a success rate of 95%, while non-franchised business start-ups have a failure rate above 90%.

Here is a statement taken from the website of a brand-new laser hair-removal franchise:

We realize that as a prospective franchisee your major concern is security for your investment. Let us place your mind at ease with some facts and figures about the franchise industry.

The United States Department of Commerce reports that less than 5% of the nation’s franchises fail each year (see chart above). Compare that to the Small Business Administration’s records showing that over 80% of all private businesses eventually fail, most of them within the first year. The result is a win-win situation as evidenced by the Department of Commerce statistics.

The problem is that neither the Department of Commerce nor the Small Business Administration ever issued the oft-quoted statistics. Neither the statistics regarding the high failure rates of independent businesses nor the low failure rates of franchised businesses have been definitively validated.

In 2005, the International Franchise Association issued a memorandum to its members acknowledging the invalidity of the statistics, and instructing them to stop using them. However, there remain over 100 websites and franchise brochures that tout these untrue statistics, and dozens of articles from respected trade publications.

So what’s wrong with a bogus statistic that seems to state the obvious? In my opinion, plenty. These bogus statistics create several false impressions that you should guard against. The first impression is that all franchise opportunities are equal, and can be combined into a single survival statistic. This is not so. There are three types of franchise programs: good franchise programs, damned franchise programs and grab-your-checkbook-and-run franchise programs. Judge each company by its own merits, not by some myth of general franchise invulnerability.

The second dangerous impression is the implication that if you buy a franchise, you cannot fail. This is simply not true. Any business venture contains an element of risk. The question is whether the benefits a given franchise provides put you in a superior position than if you attempted to start a similar business on your own. Additionally, fear of failure is one of the strongest motivators you have on your side. I believe anyone who is NOT afraid of failure shouldn’t be opening a business in the first place.

The underlying danger of the “All franchises are successful” myth is that it implies that the system itself is what will account for your success or failure. In most cases, it is not the system, but your continual implementation of that system that will determine your success or failure.

Also, beware of references to sales levels and profitability.
Franchisors are prohibited to making any claims regarding projected or potential revenue or earnings unless they are disclosed in Item 19 of the FDD (Franchise Disclosure Document, formerly the UFOC Uniform Franchise Offering Circular), using a prescribed format called an “Earnings Claim.” If a franchisor or franchise sales person provides you with sales figures or profit margins outside of this prescribed format, you should be very wary. Franchise owners of the chain are free to provide sales and profitability figures, but franchisors and their sales agents are not.

Here are two examples of illegal earnings claims that appeared in franchisor’s marketing materials. We found this illegal claim recently on the public website of a computer services franchisor:

>As a [NAME WITHHELD] Franchise owner you can potentially make anywhere from $30,000 to $100,000 or more per year. A typical day is 1-4 appointments at 1-2 hours per appointment at $40-$95 per hour.
A driveway seal coating franchisor had this illegal earnings claim posted on the franchise section of his website. Franchisors are also forbidden from furnishing information for you to use to “do the math.”

The average amount collected for each driveway we service is $347.56, and $2,109.78 for each parking lot. The capacity of our franchisees in their first year is 12 driveways per day and up to 4 parking lots per day. DO THE MATH.

Here’s one from the website of a new health and wellness center franchise:

Becoming a [NAME WITHHELD] franchisee will be hard work, but you’ll be rewarded with a nice retirement in no time at all.

“Fluff” statements like this might seem harmless to new or inexperienced franchisors, but they are illegal and irresponsible. No one can promise you a “nice retirement.” And how long is “no time at all”? Illegal earnings claims subject the franchisor to future litigation by a franchisee or franchisees who fail to achieve the desired results, for whatever reason. Even if the franchisor did not intend to deceive, you do not want to have a franchisor who will end up focusing on franchisee lawsuits rather than providing you with the support you’re entitled to.

If you’re looking for a promise of success, keep your job

No one can honestly promise success. Furthermore, the FTC Rule and many state laws prohibit franchisors from making statements that promise success. If a sales pitch or franchisor’s marketing materials contain assurances that you “can’t miss” or that they have a “100% success rate,” proceed with caution or don’t proceed at all. They are either ignorant of the restrictions on franchise marketing or are knowingly breaking them; neither is acceptable.

I believe franchising is, in theory, and in some circumstances, and with the right company and concept, can be the soundest and most practical to start a small business. Buy it will work for you only if you go into franchising with your eyes wide open, and with a willingness to take responsibility for your own success. The franchisor provides the blueprint and the tools; you must build the business. Stay away from any franchisor or salesperson who tells you otherwise.

NOTE: At FranBest.Com, our policy is not to provide positive exposure to any franchisor who who uses bogus or misleading statistics, illegal earnings claims, irresponsible claims, or hard-sell sales tactics. Please report any evidence to the contrary to the editor. Visit our Franchises Worth Discovering page.

This article is very important. And its absolutely true regarding many franchises especially Pirtek. The statistics are produced by the franchisor. If a franchise fails in, lets say, Mobile, AL. and a new owner takes over in a process known as “refranchising” then the record only shows a resale or maybe the record shows nothing, but the truth is the first owner failed and now with a new infusion of cash and a new owner the life expectancy of a franchise at the same location is recorded as a success rather than a second franchise. If you are seriously thinking about buying any franchise “system”, just take your best estimate of start-up capital required and double it. That much fear and that much cash will get you past 5 years. The best businesses are not franchised, IMHO. Feel free to contact me if you have any questions. I have made a lot of money as a franchisee, I have also lost big bucks as a franchisee. Good luck.